Tuesday, April 26, 2016

Golden Arches Besieged

by JASmius

Do you want, or have you ever wanted, to invest in a McDonalds franchise and become a McOwner/Operator?  Own your own business, even your own mini-round & brown empire?  Get rich, or at least live comfortably off of your earnings?

Too late.  All the former profit will be flowing into either the pockets of pimply-faced, tattoo-covered burger-flippers or automated order-taking kiosk machine manufacturers - and probably much more the latter than the former:

A former high-ranking McDonald’s executive warns that a $15 minimum wage erases all of the profit at independent franchisees.

“I worked for the company for three decades, and served as its USA President for thirteen years. I can assure you that a $15 minimum wage won’t spell the end of the brand,” said Ed Rensi, the former president and chief executive officer of McDonald’s USA. “However it will mean wiping out thousands of entry-level opportunities for people without many other options,” Rensi wrote for Forbes....

“The $15 minimum wage demand, which translates to $30,000 a year for a full-time employee, is built upon a fundamental misunderstanding of a restaurant business such as McDonald’s. 'They’re making millions while millions can’t pay their bills,' argue the union groups, suggesting there’s plenty of profit left over in corporate coffers to fund a massive pay increase at the bottom,” he explained. [emphasis added]

In other words, "Corporation/business owner = rich beyond the dreams of avarice, so fork it over before we burn down this grease shack!"  Gimmie, gimmie, gimmie.


“In truth, nearly 90% of McDonald’s locations are independently-owned by franchisees who aren’t making 'millions' in profit. Rather, they keep roughly six cents of each sales dollar after paying for food, staff costs, rent and other expenses,” he claimed. [emphases added]

As a former financial executive for a dedicated McDonalds supplier myself who worked on pricing that was submitted to McDonalds corporate quarterly, I can resoundingly corroborate Mr. Rensi's statement.

“A typical franchisee sells about $2.6 million worth of burgers, fries, shakes and Happy Meals each year, leaving them with $156,000 in profit.

Thus requiring the independent owner/operator to own at least a baker's dozen restaurants in order for him or her to make "millions" in profits.  And, of course, his or her costs are also multiplied by that same factor, and will wipe out those "millions" in profits just as quickly.

I know, math is hard.

If that franchisee has fifteen part-time employees on staff earning minimum wage, a $15 hourly pay requirement eats up three-quarters of their profitability. (In reality, the costs will be much higher, as the company will have to fund raises further up the pay scale.) For some locations, a $15 minimum wage wipes out their entire profit,” he wrote.

“Recouping those costs isn’t as simple as raising prices. If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it.“ [emphases added]

It's all interconnected and goes right back up the supply chain.  If owner/operators have to tighten their belts, so do dedicated suppliers, and their suppliers, etc.  The pressure from McCorporate to hold down prices was becoming overwhelming three years ago.  That was one of the factors that clued me in on the fact that my time there was drawing to a close.  I did the third quarter 2013 pricing, like I had been for years, and produced an average increase of five cents per dozen.  The new bakery president/COO, who was (1) a generation younger and (2) didn't handle pressure form above nearly as well as his retired predecessor, took one look at my numbers and blew his stack, ranting and raving that McDonalds corporate would "never accept" a nickel per dozen increase.  And then, several weeks later when he and I were preparing for the semi-annual board meeting, he berated me for not have raised our prices enough after he had lowered the increase to three cents a dozen.

Obviously, William Wayne Zimmerman III had more bosses than I did.  And he was a bastard.

But no business can simply raise prices as much as it wants without reducing demand for its product.  And when that business and its product is in an "economical" market niche that doesn't allow massive price spikes, cost-control becomes magnified in importance.

And a $15 an hour minimum wage makes that functionally impossible.  Which is why McDonalds across the country are going to inexorably become replimats, or disappear altogether.

"We do it all for you," my ass.

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